Homeowners With Four or More Properties Face Extra Regulation as Buy-to-Let Rulings Tighten

The Government has announced plans to roll out further rules later this year in an effort to tighten control on private landlords.  The announcement comes as part of a series of new rulings for the buy-to-let sector.

What has changed?

Buy-to-let property owners will soon be expected to prove they have liquidity when applying for finance by divulging their other assets, liabilities and tax positions and shop bank statements.  Lenders will also require a business plan from the potential borrower, as well as details of the landlord’s purpose for the investment and an exit strategy.

Lenders will have some stretch on the PRA’s rules when assessing an application but are expected to request a landlord’s full portfolio.  Currently, lenders assess a new mortgage in segregation and presume any other properties are self-financing. “Now you will have to prove they are,” says Shaun Church – Director of Private Finance.

Only three lenders have announced their terms so far: Aldermore Bank, Paragon Mortgages and the Mortgage Works

Controversial Decisions

The proposed changes to the system have been dubbed “punishment” by former Tory leader Iain Duncan Smith who stated the Government needs to rethink its stamp duty and mortgage relief reforms.   

“It is time for us to reconsider the way we treat private landlords who buy houses to rent. Many of them are talking about no longer buying to let, and they blame it on Osborne’s decision to impose a stamp duty levy on the purchase of homes to rent, to restrict mortgage interest relief to the basic rate of income tax, and to tax a landlord’s turnover rather than profits.

“This, they believe, has led to private landlords scaling back their operations or even leaving the sector altogether. We should all be concerned about this because private landlords are a significant provider of the additional housing we need.” Stated the former work and pensions secretary.

“It is going to get harder for landlords. We are seeing lenders implement the changes early and some are pulling out of lending to portfolio landlords,” says Mr. Church. “You need to be on top of it and thinking not just what life will be like in six months’ time but years down the line.”

How Will This Affect Landlords?

‘Portfolio landlords’, those with four or more mortgaged properties, will be the first to feel the effect of the changes.  The PRA stated, “lending to portfolio landlords is inherently more complex given the quantum of debt in aggregate”.

Compared with the growth of 2% in owner-occupier mortgages the total stock of banks’ buy-to-let mortgages is up by 40% since 2008.  Buy-to-let loans make up roughly 15% of lender’s mortgage books, meaning that the apposition of banks could be jeopardised in the event of an influx of defaults.

The higher rate of 3 percentage points above the previous stamp duty land tax rate (SDLT), which came into effect 1 April 2016 after the Bank of England stated that excessively indebted landlords posed a risk to the economy if they were unable to repay their mortgages, was introduced to provide £60 million for communities in England, where the impact of second homes is especially poignant. The change in SDLT means landlords are no longer able to claim tax relief on mortgage interest payments.  Tighter control of the sector means that by 2020 landlords will only be able to claim tax credit at the basic rate of 20%. 

Effect on the Economy

Plans to control the buy-to-let sector have not been met with disagreement by all, however, with data suggesting the tighter regulations on landlords will be beneficial to the economy.

The University of Sheffield conducted research into the effects of the buy-to-let sector on the UK property market in 2015.  The data reflects a need for ‘tenant power’ and states politicians must address the renting crisis in the UK.  17% of British households (10 million people) now live in the private rented sector compared to 10% in 1999.  This rise has had a detrimental effect on the property market as homes normally purchased by first-time buyers are bought by private landlords then rented back to them.

“It’s time for tenants in the private rented sector to assemble and begin sharing their experiences, set priorities, and galvanize each other to act together to win greater tenant protections” Dr. Desiree Fields, The University of  Sheffield.

Not all Doom and Gloom

Whatever your views, it is certain that the next few months will be turbulent ones for private landlords. However, assuming the essential components that have driven the need for buy-to-let up until now, including high property costs, a supply-demand imbalance, low saving rates, stock market intensity and the perception many people have that investing in property is as safe as houses, then the market should remain immutable.